Economics

Growth in the Rental Market Comes Down to Economics

It comes down to when, and if, younger customers want to buy.

Peter James FieldRick Palacios Jr. is senior research analyst with John Burns Real Estate Consulting.

Yes. Economic and societal shifts will drive long-term demand.

The bursting of the housing bubble and subsequent economic malaise are a boon to the rental market. Mortgage lending is stringent, homeownership is plummeting, and rents are surging. Multifamily supply is becoming a concern in a handful of metros, but most core apartment markets are far from being oversupplied.

But while this perfect storm is a byproduct of the current state of the economy, the rental market should see growth well into the future.

Lastly, a paradigm shift will contribute to the long-term decline in homeownership: the acceptance and abundance of debt among 25- to 34-year-olds. The piling on of debt (e.g., student loans), and a significant increase in monthly expenses will make it more difficult for today’s younger customers to purchase a home throughout their lifetime.

This, along with inflation-adjusted wages that have actually declined for college graduates over the last decade, adds further credence to our long-term growth outlook that the major implication of this homeownership rate decline will be an unprecedented 8.2 million additional single-family renters between 2010 and 2015, and 3.7 million more apartment renters.

Peter James FieldJoel Kotkin is the author of The Next Hundred Million: America in 2050.

No. The long-term demand just won't be there.

The renter base has expanded recently only because people don’t have a choice. The rental market is bolstered by a weak economy, and if the new normal is 1 percent to 2 percent GDP growth and 7 percent to 9 percent unemployment, you’re going to have a strong rental market.

As for minorities, Latinos, for example, are more family- and ownership-oriented than any other ethnic cohort.

There is always a group of people—maybe 10 percent to 20 percent—that wants to be in or near an urban environment. But in many cities, such as Fort Worth, Texas, or Raleigh, N.C., that still means living in a single-family house.

It all boils down to whether people can afford to own. The most crucial issue for the U.S. is getting up to 3 percent to 4 percent [annual GDP] growth. Otherwise, we could become a nation of serfs, paying rents to someone else, with no security; basically tenant farmers forever.

But if the economy improves, I don’t see the long-term demand for rental that many envisage. We’re all accustomed to space, privacy, quiet. And if we become a nation of apartment renters, we would become a poorer, less cohesive nation, and a lot less likely to start families.

BUILDER Online provides home builders with home building news, home plans, home design ideas, and building product information, helping them manage their home building operations efficiently and profitably.